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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

(Mark one)

 

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NO: 0-24567

 

NATROL, INC.
(Exact name of registrant as specified in its charter)

 

DELAWARE

 

95-3560780

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

21411 PRAIRIE STREET
CHATSWORTH, CALIFORNIA 91311

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

(818) 739-6000
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

INDICATE BY A CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES  ý   NO  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule  12b-2). Yes o No ý

 

Indicate the number of shares outstanding of the issuer’s common stock, as of the latest practicable date:

 

Class

 

May 10, 2004

 

 

 

Common stock, $0.01 par value

 

13,222,969

 

 



 

PART 1. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

Natrol, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,
2004

 

December 31,
2003

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

5,432

 

$

2,599

 

 

 

 

 

 

 

Accounts receivable, net of allowances of $683 and $635 at March 31, 2004 and December 31, 2003, respectively

 

9,163

 

7,698

 

Inventory

 

10,534

 

9,053

 

Income taxes receivable

 

61

 

349

 

Deferred income taxes

 

1,110

 

1,110

 

Prepaid expenses and other current assets

 

978

 

914

 

Net assets of discontinued operations

 

86

 

35

 

Total current assets

 

27,364

 

21,758

 

Property and equipment:

 

 

 

 

 

Building and improvements

 

15,626

 

15,612

 

Machinery and equipment

 

5,154

 

5,215

 

Furniture and office equipment

 

2,872

 

3,158

 

 

 

23,652

 

23,985

 

Accumulated depreciation

 

(7,224

)

(7,315

)

Property and equipment, net

 

16,428

 

16,670

 

Restricted cash

 

5,000

 

5,000

 

Deferred income taxes

 

3,902

 

3,902

 

Goodwill, net of accumulated amortization and impairment charge of $37,381

 

2,026

 

4,026

 

Other assets

 

119

 

83

 

Total assets

 

$

54,839

 

$

51,439

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

8,063

 

$

5,601

 

Accrued expenses

 

1,794

 

1,732

 

Accrued payroll and related liabilities

 

1,169

 

772

 

Current portion of long-term debt

 

332

 

325

 

Total current liabilities

 

11,358

 

8,430

 

Long-term debt, less current portion

 

7,364

 

7,451

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value of $0.01 per share:
Authorized shares—2,000,000; Issued and outstanding shares-none

 

 

 

 

 

Common stock, par value of $0.01 per share:
Authorized shares—50,000,000

 

 

 

 

 

Issued and outstanding shares-14,127,536 and 14,054,309 at March 31, 2004 and December 31, 2003, respectively

 

141

 

141

 

Additional paid-in capital

 

62,486

 

62,377

 

Accumulated deficit

 

(23,629

)

(24,079

)

 

 

38,998

 

38,439

 

Shares held in treasury, at cost-921,900 shares at March 31, 2004 and December 31, 2003

 

(2,881

)

(2,881

)

Total stockholders’ equity

 

36,117

 

35,558

 

Total liabilities and stockholders’ equity

 

$

54,839

 

$

51,439

 

 

See accompanying notes

 

2



 

Natrol, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except share and per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2004

 

2003

 

 

 

(Unaudited)

 

Net sales

 

$

20,425

 

$

18,995

 

Cost of goods sold

 

12,595

 

10,866

 

Gross profit

 

7,830

 

8,129

 

Selling and marketing expenses

 

4,619

 

4,969

 

General and administrative expenses

 

2,325

 

2,639

 

Total operating expenses

 

6,944

 

7,608

 

Operating income from continuing operations

 

886

 

521

 

Interest income

 

22

 

10

 

Interest expense

 

(158

)

(162

)

Income from continuing operations before income taxes

 

750

 

369

 

Income tax provision

 

300

 

141

 

Income from continuing operations

 

450

 

228

 

Discontinued operations:

 

 

 

 

 

(Loss) from operations

 

 

(573

)

Income tax benefit

 

 

221

 

Loss on discontinued operations

 

 

(352

)

Net Income (loss)

 

$

450

 

$

(124

)

Basic and Diluted income (loss) per share:

 

 

 

 

 

Income (loss) per share from continuing operations

 

$

0.03

 

$

0.02

 

Loss per share from discontinued operations

 

$

 

$

(0.03

)

Income (loss) per share

 

$

0.03

 

$

(0.01

)

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

Basic

 

13,162,459

 

12,870,598

 

Diluted

 

14,175,061

 

12,879,181

 

 

See accompanying notes

 

3



 

Natrol, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2004

 

2003

 

 

 

(Unaudited )

 

Operating activities

 

 

 

 

 

Net Income (loss)

 

$

450

 

$

(124

)

Loss from discontinued operations

 

 

352

 

Income (loss) from continuing operations

 

450

 

228

 

 

 

 

 

 

 

Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:

 

 

 

 

 

Loss from discontinued operations

 

 

(352

)

Change in net assets of discontinued operations

 

(51

)

(305

)

Depreciation and amortization

 

319

 

372

 

Loss on disposal of property and equipment

 

2

 

 

Provision for bad debts

 

48

 

55

 

Shares issued for services

 

 

15

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,513

)

(1,220

)

Inventory

 

(1,481

)

150

 

Income taxes receivable/payable

 

288

 

12

 

Prepaid expenses and other current assets

 

(64

)

14

 

Accounts payable

 

2,462

 

1,348

 

Accrued expenses

 

62

 

(1,299

)

Accrued payroll and related liabilities

 

397

 

(86

)

Net cash provided by (used in) operating activities

 

919

 

(1,068

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property and equipment

 

(79

)

(68

)

Reduction in goodwill

 

2,000

 

 

Other assets

 

(36

)

 

Net cash provided by (used in) investing activities

 

1,885

 

(68

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Repayments on long-term debt

 

(80

)

(76

)

Proceeds from issuance of common stock

 

109

 

 

Net cash (used in) provided by financing activities

 

29

 

(76

)

Net (decrease) increase in cash and cash equivalents

 

2,833

 

(1,212

)

Cash and cash equivalents, beginning of period

 

2,599

 

10,077

 

Cash and cash equivalents, end of period

 

$

5,432

 

$

8,865

 

 

See accompanying notes

 

4



 

NATROL, INC.
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 

1. BASIS OF PRESENTATION

 

The accompanying consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  This Report on Form 10Q should be read in conjunction with the Company’s annual report on Form 10K for the year ended December 31, 2003.  Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations.  The information reflects all normal and recurring adjustments which, in the opinion of the Company’s management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein.  The results for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year or any other period.

 

2.               STOCK BASED COMPENSATION

 

The Company accounts for its employee stock option plan under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations.  The Company has a stock-based compensation plan.  The Company’s operating results do not include a compensation charge related to this plan, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on the operating results and per share amounts if the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based compensation, had been applied to stock-based employee compensation:

 

 

 

3 Months Ended
March 31,

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

450

 

$

228

 

Total stock-based employee compensation expense determined under the fair value-based method for all awards, net of related tax benefits (“Stock Compensation”)

 

(27

)

(40

)

Income (loss) from continuing operations—pro forma

 

423

 

188

 

Loss from discontinued operations

 

 

(352

)

Net Income (loss)—pro forma

 

423

 

(164

)

Income per share from continuing operations:

 

 

 

 

 

Basic—as reported

 

$

0.03

 

$

0.02

 

Diluted—as reported

 

$

0.03

 

$

0.02

 

Basic—pro forma

 

$

0.03

 

$

0.01

 

Diluted—pro forma

 

$

0.03

 

$

0.01

 

Net loss per share:

 

 

 

 

 

Basic—as reported

 

$

0.03

 

$

(0.01

)

Diluted—as reported

 

$

0.03

 

$

(0.01

)

Basic—pro forma

 

$

0.03

 

$

(0.01

)

Diluted—pro forma

 

$

0.03

 

$

(0.01

)

 

During the three months ended March 31, 2004, 35,000 stock options were granted with an exercise price of $3.04 which equaled the fair value of the underlying Common Stock on the date of grant.

 

5



 

3.   INVENTORY

 

Inventories consist of the following:

 

 

 

March 31,
2004

 

December 31,
2003

 

 

 

 

 

 

 

Raw material and packaging supplies

 

$

4,704

 

$

3,736

 

Finished goods

 

5,830

 

5,317

 

Raw material and packaging supplies

 

$

10,534

 

$

9,053

 

 

4. SHIPPING AND HANDLING COSTS

 

The Company records all amounts charged to customers for shipping and handling as revenue. All outbound shipping and fulfillment costs are classified as selling and marketing expenses and totaled $858,000 and $797,000 for three months ended March 31, 2004 and 2003 respectively.

 

5. EARNINGS PER SHARE

 

Basic earnings per share have been computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share have been computed by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents (stock options), when dilutive.

 

6.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities (“FIN 46”). In December 2003, FIN 46 was replaced by FASB interpretation No. 46(R) “Consolidation of Variable Interest Entities.” FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46(R) requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entity’s expected losses, is entitled to receive a majority of the entity’s expected residual returns, or both. FIN 46(R) is effective for entities being evaluated under FIN 46(R) for consolidation no later than the end of the first reporting period that ends after March 15, 2004. The Company does not currently have any variable interest entities that will be impacted by adoption of FIN 46(R).

 

7.  DISCONTINUED OPERATIONS

 

In December 2003, the Company discontinued its Annasa and Tamsol units.  Annasa, a subsidiary of Natrol and a multi-level marketer of proprietary nutritional products began operations in 2002.  Tamsol, was also formed in 2002, to generate direct-to-consumer sales via radio, television, direct mail and other non retail venues.  The Company has reclassified its financial statements to segregate the revenues, direct costs and expenses (excluding allocated costs), assets and liabilities and cash flows of the discontinued operations.  The net operating results, net assets and net cash flows of these businesses have been reported as “Discontinued Operations” in the accompanying consolidated financial statements.

 

6



 

Summarized financial information for the discontinued operations is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2004

 

2003

 

Annasa:

 

 

 

 

 

Revenue

 

 

$

150

 

Gross Margin

 

 

112

 

 

 

 

 

 

 

Selling and Marketing expenses

 

 

330

 

General and administrative

 

 

291

 

Loss from operations

 

 

(509

)

Income tax benefit

 

 

196

 

Net loss

 

 

$

(313

)

 

 

 

 

 

 

Tamsol:

 

 

 

 

 

Revenue

 

 

$

22

 

Gross Margin

 

 

22

 

 

 

 

 

 

 

Selling and Marketing expenses

 

 

19

 

General and administrative

 

 

67

 

Loss from operations

 

 

(64

)

Income tax benefit

 

 

25

 

Net loss

 

 

$

(39

)

 

 

 

March 31,
2004

 

December 31,
2003

 

Net assets of discontinued operations:

 

 

 

 

 

Current assets

 

$

75

 

$

116

 

Total assets

 

87

 

151

 

Current liabilities

 

1

 

116

 

Net assets of discontinued operations

 

86

 

35

 

 

8. LITIGATION SETTLEMENT

 

During March 2004, the Company settled its litigation with the former owners of Prolab Nutrition, Inc.  The Company received $2 million in cash, which was reflected in the financial statements for the quarter ending March 31, 2004 as a reduction of goodwill.

 

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report contains “forward looking statements.” Natrol, a Delaware corporation organized in 1980, is including this statement for the express purpose of availing itself of protections of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward looking statements. Examples of forward looking statements include, but are not limited to, the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “intend,” “estimate,” “assume,” “plan,” or “anticipates” or the negative thereof, other variations thereon, or comparable terminology, or by discussions of strategy that predict or indicate future events or trends or that are not historical facts. The Company cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect its current expectations of the approximate outcome of the matter discussed. The Company does not undertake any obligation and does not currently intend to update any such statements at any time in the future.

 

The Company’s ability to predict results or the effect of certain events on the Company’s operating results is inherently uncertain. Forward-looking statements should not be unduly relied on since they involve known and unknown risks, uncertainties and other factors, some of which are beyond the Company’s control. These risks, uncertainties and other factors may cause actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Therefore, the Company wishes to caution each reader of this report to carefully consider the following factors and certain other factors discussed herein and factors discussed in other past reports. The factors discussed herein may not be exhaustive. Therefore, the factors contained herein should be read together with other reports and documents that are filed by the Company with the SEC from time to time, which may supplement, modify, supersede or update the factors listed in this document.

 

7



 

Factors that could cause or contribute to the Company’s actual results differing materially from those discussed herein or for the Company’s stock price to be affected adversely include, but are not limited to: (i) industry trends, including a general downturn or slowing of the growth of the dietary supplement industry; (ii) increased competition from current competitors and new market entrants including but not limited to increased competition from private label house brands supported by retailers seeking to increase the market share of their proprietary house brands because private label brands control the largest share of the vitamin, mineral and supplement (VMS) sector; (iii) adverse publicity regarding the dietary supplement industry or the Company’s products; (iv) exposure to product liability claims, in particular because the Company beginning in July, 2003 has chosen to self-insure against product liability claims due to the high price of product liability insurance, the inability to secure occurrence based coverage, as well as the limited amount of coverage provided by insurers willing to provide insurance at high prices; (v) exposure to and the expense of resolving and defending potential product liability claims that are left uncovered by insurance; (vi) the Company’s dependence upon its ability to develop new products; (vii)  returns of the Company’s products which may be returned by customers at any time due to lack of sell through to consumers or because competitors have convinced the Company’s customers that Natrol’s products should be replaced with competitor products; (viii) the Company’s ability to manage inventory or sell its inventory before such inventory becomes outdated, (xix) the Company’s ability to gain or expand or maintain distribution within new or existing customers and new or existing channels of trade; (x) an increase in the cost of obtaining and maintaining shelf space with major national retailers who demand various forms of incentives from their suppliers such as slotting fees, coop advertising, or rebates; (xi) adverse changes in government regulation or changes in local or national laws; (xii) dependence on significant customers; (xiii) the Company’s ability to keep and attract key management employees; (xiv) the Company’s inability to manage growth and execute its business plan, or the Company’s ability to modify its business plan in response to market conditions, including, but not limited to, its ability to enter into new businesses and capitalize upon new business opportunities; (xv) the Company’s ability to consummate future acquisitions and its ability to integrate acquired businesses; (xvi) the absence of conclusive clinical studies for many of the Company’s products; (xvii) the Company’s inability to obtain raw materials that are in short supply including its ability to obtain garlic powders or arabinogalactan for its EPI raw material sales division; (xviii) sales and earnings volatility, (xix) volatility of the stock market; (xx) the Company’s ability to manufacture its products efficiently; (xxi) the Company’s reliance on independent brokers to sell its products; (xxii) the inability of the Company to protect its intellectual property; (xxiii) control of the Company by principal shareholders, (xxiv) the possible sale of large amounts of stock by controlling stockholders; (xxv) a general downturn in the national economy as a whole; (xxvi) continued market acceptance of Natrol supplements, Laci Le Beau teas, Prolab’s sports nutrition products, and EPI’s raw material products, (xxvii) increases in the cost of borrowings; (xxviii) and, the unavailability of additional debt or equity capital; (xix) legal actions brought forth by federal, state and local governmental and private parties.

 

RESULTS OF OPERATIONS

 

The following discussion of the results of operations and the financial condition of the Company should be read in conjunction with the response to Part 1 Item 1 of this report.

 

THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003

 

NET SALES. The Company recognizes revenue from sales only after product is shipped and title is transferred. Net sales represent product shipped less actual and estimated future returns, spoilage allowances, allowances for product deemed to be unsaleable by customers, free goods shipped to customers for promotional or other purposes and slotting fees. Estimates and allowances are based upon known claims and an estimate of additional returns, however, the amount of future returns can be reasonably estimated.

 

Net sales increased 7.5%, or $1.4 million, to $20.4 million for the three months ended March 31, 2004 from $19.0 million for the three months ended March 31, 2003.  Approximately 63% of the increase in net sales during the quarter was from sales of Natrol products and another 6% of the increase in net sales was due to sales of Prolab branded products.  The Company’s EPI raw material and contract packaging division accounted for the remainder of the increase in net sales.

 

GROSS PROFIT.  Gross profit decreased 3.7%, or $0.3 million, to $7.8 million for the three months ended March 31, 2004 from $8.1 million for the three months ended March 31, 2003. Gross margin decreased to 38.3% for the three months ended March 31, 2004 from 42.8% for the three months ended March 31, 2003.  The decrease in gross margin was primarily due to a shift in product mix at the Company’s EPI division. The EPI division sells raw material ingredients as well as contract manufacturing services.  The contract manufacturing margins are lower than the gross margin for raw material sales.  During the first quarter 2004 the division’s sales revenue was derived primarily from contract manufacturing business which negatively affected the overall gross margin for the Company.

 

SELLING AND MARKETING EXPENSES.  Selling and marketing expenses consist primarily of advertising and promotional expenses, cost of distribution, and related payroll expenses and commissions. Selling and marketing expenses decreased 7.0%, or $0.3 million, to $4.6 million for the three months ended March 31, 2004 from $4.9 million for the three months ended March 31, 2003. The

 

8



 

decrease was due to lower media and public relations expenditures in first quarter 2004 than in first quarter 2003 which were partially offset by increases in payroll and shipping costs.

 

GENERAL AND ADMINISTRATIVE EXPENSES.  General and administrative expenses consist primarily of personnel costs related to general management functions, finance, accounting and information systems, as well as professional fees related to legal, audit and tax matters and depreciation. General and administrative expenses decreased 11.9%, or $0.3 million to $2.3 million for the three months ended March 31, 2004 from $2.6 million for the three months ended March 31, 2003.  The cost of general and product liability insurance was $0.3 million less in first quarter 2004 than in first quarter 2003 due to the implementation of the Company’s self insurance program in July of 2003. Legal expenditures were also $0.3 million less in the first quarter 2004 than in the first quarter 2003.  The decrease was due to a number of factors including a greater proportional use of in-house counsel as opposed to outside counsel. These savings in 2004 were partially offset by higher payroll costs and other administration expenses.

 

INTEREST EXPENSE.  The Company recorded interest expense of $158,000 for the three months ended March 31, 2004 as compared to interest expense of $162,000 for the three months ended March 31, 2003. The Company pays interest on approximately $7.7 million of long-term mortgage debt.

 

INCOME TAX PROVISION. For the three months ended March 31, 2004 the Company’s effective tax rate was approximately 40.0%.  For the three months ended March 31, 2003 the Company’s effective tax rate was 38.2%.

 

DISCONTINUED OPERATIONS. In December 2003, the Company discontinued its Annasa and Tamsol units.  Annasa, a subsidiary of Natrol, a multi-level marketer of proprietary nutritional products began operations in 2002.  Tamsol, was also formed in 2002, to generate direct-to-consumer sales via radio, television, direct mail and other non retail venues.  The Company has reclassified its financial statements to segregate the revenues, direct costs and expenses (excluding allocated costs), assets and liabilities and cash flows of the discontinued operations.  The net operating results, net assets and net cash flows of these businesses have been reported as “Discontinued Operations” in the accompanying consolidated financial statements. As the operations were shut down as of the end of calendar 2003, the Company had no revenue or expenses from discontinued operations in the first quarter of 2004.  During the first quarter of 2003, the Company had a net loss of $352,000 from discontinued operations.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2004, the Company had working capital of $16.0 million as compared to $13.3 million in working capital at December 31, 2003. The Company’s cash balance at March 31, 2004 was approximately $5.4 million.  The increase in working capital was primarily due to the receipt of $2.0 million from settling litigation with the former owners of Prolab Nutrition, Inc. The cash receipt was recorded as a reduction of goodwill.

 

Net cash provided by operating activities was $0.9 million for the three months ended March 31, 2004 versus net cash used of $1.1 million for the three months ended March 31, 2003. Cash provided by operating activities during the three months ended March 31, 2004 consisted of $450,000 of net income earned during the quarter, an increase in accounts payable and other accrued expenses of $2.9 million, and increase in income taxes payable of $0.3 million, depreciation of $0.3 million offset by an increase in accounts receivable of $1.5 million and an increase in inventory of $1.5 million.  The increase in inventory was due to additional purchases of raw materials and the stocking higher levels of finished goods inventory in anticipation of improving service levels with customers. The increase in accounts receivable was largely due to the timing of sales. The increase in accounts payables was also due to the timing of certain payments.

 

Net cash provided by investing activities was $1.9 million for the three months ended March 31, 2004 versus net cash used of $68,000 during the three months ended March 31, 2003. The settlement of the litigation with the former owners of Prolab Nutrition, Inc., which was recorded as a reduction of goodwill, provided $2.0 million of cash which was offset by investment in property and equipment.  All of the investment in the three months ended March 31, 2003 was in property and equipment.

 

Net cash provided by financing activities was $29,000 for the three months ended March 31, 2004 as opposed to $76,000 used in financing activities during the three months ended March 31, 2003. During the three months ended March 31, 2004, the Company made principal payments of $80,000 on its long-term mortgage debt and received $109,000 from the exercise of stock options and the purchase of stock through the Company’s Employee Stock Purchase Plan.  During the three months ended March 31, 2003 the Company made principal payments of $76,000 on its long-term mortgage debt.

 

As of March 31, 2004, the Company had $7.7 million of outstanding debt all of which is the result of long-term mortgage debt on the Company’s manufacturing/headquarters facility and on the Company’s shipping facility. The Company has no line of credit in place.

 

The Company believes that its cash balance together with cash generated from operations should be sufficient to fund its anticipated working capital needs and planned capital expenditures for the next twelve months. However, if the Company does not meet its operating plan it may also need additional borrowings to fund working capital needs.

 

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The Company currently has no outstanding debt on its books other than the mortgage debt on its properties. In order to meet current financing needs for working capital, the Company may need to open bank lines of credit.  In order to meet its long-term liquidity needs, the Company may be required to incur additional indebtedness or issue additional equity and debt securities, subject to market and other conditions. There can be no assurance that such additional financing will be available on terms acceptable to the Company or at all. The failure to raise the funds necessary to finance its future cash requirements or consummate future acquisitions could adversely affect the Company’s ability to pursue new acquisitions and could negatively affect its operations in future periods.

 

CRITICAL ACCOUNTING POLICIES

 

Management’s beliefs regarding significant accounting policies have not changed significantly from those discussed in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There has been no material change during the three months ended March 31, 2004 from the disclosures about market risk provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

ITEM 4. CONTROLS AND PROCEDURES

 

An evaluation was conducted under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)14(c) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no significant changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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PART II

 

OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

None

 

ITEM 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

None

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None

 

ITEM 5.  OTHER INFORMATION

 

CODE OF ETHICS

 

The Company has not, as of the filing of this document, adopted a Code of Ethics.  The Company intends to adopt such a plan prior to the annual shareholders’ meeting in June 2004.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

Form 8-K filed on March 31, 2004

 

Exhibit 31.1

 

Certification of Chief Financial Officer

Exhibit 31.2

 

Certification of President/CEO/Chairman

Exhibit 32.1

 

Certification of Chief Financial Officer

Exhibit 32.2

 

Certification of President/CEO/Chairman

 



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

NATROL, INC.

 

 

 

Date: 5/17/04

By:

/s/ Elliott Balbert

 

 

 

Chairman, President and Chief Executive
Officer

 

 

 

Date: 5/17/04

By:

/s/ Dennis R. Jolicoeur

 

 

 

Chief Financial Officer and Executive
Vice President

 

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